The first full week of June was again characterized by foggy and uncertain geopolitical headlines, but the number of positive fundamental developments continued to outweigh those that in isolation would be viewed with a negative lens. As a result, domestic equities managed to build on the positive result for May with an advance of +1.7% for the S&P500. The profile of the advance also implies that the current tone of the market is risk-seeking with more economically sensitive corners and asset classes within the market acting well. When including last week, the S&P500 is up +4.8% to-date in 2018 compared with small-size companies that sport a +9.5% return over the same period as measured by the Russell 2000. By contrast however, international baskets as measured by the MSCI EAFE index are only narrowly positive with just a +0.1% change YTD.
Indeed, it appears there is a rotation in sentiment underway. Whereas investors were excited by returns offered by international investing during 2017, sentiment toward the same group feels sharply less favorable this calendar year. It is not difficult to understand why: trade, tariffs, and geopolitical situations highlight why investing abroad feels more uncertain and unsettling than staying domestic. And economic data while resoundingly still strong in the US has looked less convincing if not toppy abroad. And while the perspective that international economies are arguably earlier in their economic recoveries than is the US, the political dynamic and economic trajectories among individual countries are far more bifurcated than can be said of here in North America. The brief shock experienced at the end of May wherein anxiety spiked over Italian politics and implications for its EU membership and overall debt are case in point. Headlines like those are nearly impossible to handicap from an investment perspective. Another perfect example relates to where all eyes are fixated entering this 2nd week of June with the much anticipated meeting between President Trump and N. Korean leader Kim Jung-Un.
Geopolitics, investor preference, and sentiment aside, the backdrop which persists of strong economic data set against what were lofty investment multiples (valuations) entering the year continues to suggest 2018 may well turn out to be a year in which the major indexes underperform the broader economy. In asset manager terms, alpha rather than beta will be the measure of success. In fact, some suggest major indexes may make little upward progress over the next six months. This is not to suggest a bearish or negative outlook; rather it seems increasingly probable that active rather than passive approaches to investing will be rewarded. In an investing climate where the focus is increasingly on fiscal rather than monetary policy developments, it is likely to again matter more what you did or did not own rather than simply own everything via an index because fiscal policy changes have a way of picking relative winners and losers in a diverse economy. In the short-run, be careful to acknowledge that the dog-days of summer are upon us where volume typically gets sleepy and news items have a way of driving markets more than they otherwise might.